You have recently been appointed as the group financial controller of the Crosse Group. Crosse & Hook plc (Crosse) is the parent company in the group and holds investments in Saltire Handling Ltd (Saltire) and Dragon Connectors Ltd (Dragon). You are preparing the group financial statements for the year ended 31 October 2022, in accordance with International Financial Reporting Standards. There are a number of matters in Crosses individual accounts that require to be addressed before you can complete the preparation of the group financial statements.

Firstly, you have identified that no accounting entries have been made in respect of properties owned by Crosse during the year ended 31 October 2022. Relevant information is in Appendix 1.

Your assistant has also provided you with information on an arrangement which gives Crosse the right to use a machine. Your assistant is unsure how to deal with this as Crosse has not previously entered into any such arrangements. This information is in Appendix 2.

The draft statements of financial position of Crosse, Saltire and Dragon as at 31 October 2022 are included in Appendix 3. Other information relevant to the group financial statements is included in Appendix 4.

Dragon is planning on issuing 1,800,000 1 4% convertible bonds in early 2023. Crosses board of directors are considering whether Crosse should purchase all 1,800,000 of the bonds. On conversion, three bond units would convert into one 1.00 ordinary share of Dragon. Crosses board understands that the bonds will be convertible at any time from 1 January 2025 to 31 March 2025 at the holder's option. All existing and potential shares will carry equal voting rights. No contractual arrangement exists giving another entity the ability to direct the relevant activities. The group finance director has asked you to provide notes for the board explaining how this would affect the accounting for Dragon in Crosses group financial statements in the financial years ending 31 October 2023, 2024 and 2025.

QUESTIONS:

Prepare, showing all workings, any journal entries necessary to account correctly for the properties in Appendix 1 in Crosses individual accounts for the year ended 31 October 2022.

(11 marks)

In respect of the arrangement in Appendix 2:

analyse, with explanations, whether the arrangement is a lease or not; and

prepare, showing all workings, any journal entries necessary to account correctly for the arrangement in Crosses accounts for the year ended 31 October 2022.

(8 marks)

Prepare, showing all workings, the journal entries necessary for the preparation of Crosses group financial statements for the year ended 31 October 2022.

(11 marks)

Construct, showing all workings, the Crosse group statement of financial position as at 31 October 2022. (This question must be submitted in Microsoft Excel.)

(6 marks)

Select, with explanations, the appropriate accounting treatment for Dragon in Crosses group financial statements for the years ending 31 October 2023, 2024 and 2025 if Crosse is to purchase the convertible bonds.

(4 marks)

(40 marks)

Note:

Ignore taxation effect.

Question 4 must be submitted in Microsoft Excel.

APPENDIX 1 (SECTION 1)

Properties

Relevant accounting policies

Buildings are depreciated using the straight-line method over their estimated useful lives. Residual values are assumed to be nil. A full months depreciation is charged in the month of acquisition and no depreciation is charged in the month of disposal.

Buildings are revalued every three years. Crosse does not make annual transfers from Revaluation surplus to Retained earnings to offset the increased depreciation.

Investment properties are accounted for using the fair value model.

Information about properties

At 1 November 2021, Crosses Property, plant and equipment (PPE) included the following balances relating to buildings:

Group head office		Factory & warehouses
	000	000
Valuation	540	4,280
Accumulated depreciation _	(54)	(428)
Carrying amount	486	3,852
Revaluation surplus	90	820

The valuations were determined at the date of the last revaluation which took place on 31 October 2019. At that date, all buildings were estimated to have a remaining useful life of 20 years.

At 1 November 2021, Crosse also held a number of investment properties (IP), which had a total fair value at that date of 3,200,000.

On 1 June 2022, Crosse moved out of its group head office building in Stirling and into one of its investment properties in Perth which had previously been rented out under an operating lease. The Perth investment property had a fair value at 1 November 2021 of 640,000. Other relevant information is as follows:

Valuation		Est. remaining useful life
At 1 June 2022	000	years
Stirling property (included in PPE at 1 November 2021)	480	18
Perth property (included in IP at 1 November 2021)	654	25

Crosse retained the old head office building in Stirling and it was rented out under an operating lease to a third party from 1 June 2022.

APPENDIX 1 (SECTION 1) continued

During the year ended 31 October 2022, Crosse did not acquire or dispose of any properties.

At 31 October 2022, a valuation of all Crosses properties was carried out by a professional and independent expert. The results of the valuation are shown below:

	Valuation
	000
Former group head office (Stirling)	470
Factory & warehouses	4,000
New group head office (Perth)	670
Other investment properties	2,680